Nick Clegg suffered a humiliating reverse in his Sheffield backyard when the Liberal Democrats were ejected from power in the city, as the party also suffered heavy losses across England, Scotland and Wales.

As voters punished the Lib Dems for their performance after a year in government, the party blamed a "decapitation strategy" by Labour and the unions.

The Lib Dems only managed to hold on to a handful of the seats they were defending on Sheffield city council. The party also suffered setback in strongholds in Liverpool and Hull after an aggressive campaign by Labour which performed strongly across the north of England.

In the first full result of the night, Labour held onto Sunderland where it gained four seats from the Tories. The party's vote was up by an average of 20 points on 2007, the last time the same seats were contested.

Senior Lib Dems also admitted shortly before midnight that the party was on course to lose between nine and 12 of the 15 seats it was defending in Sheffield.

A third of the seats on the council, which the party has run as a minority administration for the past year, were up for election. The Lib Dems had 41 seats, with Labour trailing by just one, on 40.

Simon Hughes, the Lib Dem deputy leader said his party had suffered a poor result in Sheffield. "Sheffield is going to be different from every other council because it is Nick Clegg's seat," Hughes told the BBC. "It is his city so any anti-Nick view will be exemplified most in Sheffield."

Hughes admitted that the government's controversial decision to cancel an £80m loan to Sheffield Forgemasters was a factor. He said: "The combination of that and tuition fees mean that in the city Nick has become the issue despite of the fact that we have run the council extremely well. We haven't had mass redundancies, we have protected the frontline services."

The Lib Dems were also on course for losses in Liverpool, where the party had 35 seats to 50 for Labour, after the party's former leader on the council criticised Clegg's "record and perception".

Labour was working hard to play down expectations after Iain Duncan Smith, the work and pensions secretary, said the party should gain 1,300 seats nationally. Colin Rallings and Michael Thrasher, of Plymouth University, have said that Labour should be in the strongest position of the three main parties because the same seats were last contested in 2007, a month before Gordon Brown succeeded Tony Blair as prime minister.

Tory attacks on Labour's performance indicated that David Cameron wants to treat the Lib Dems with kid gloves after setbacks for the junior coalition party.

Meanwhile the Scottish National party was on course for a strong result amid signs that it would add about 10 seats to the 47 it won at the last election for the 129-seat Scottish parliament in 2007. The party was unlikely to win enough seats to secure a majority though a strong performance by the Greens – in the face of a poor Lib Dem performance – raised the prospect of a majority in the parliament in favour of holding a referendum on Scottish independence.

Alex Salmond, the SNP leader who is on course to serve a second term as Scotland's first minister, had indicated during the campaign that a bill on a referendum would be an issue for the latter stages of the parliament.

Salmond's success came after former Lib Dem voters have switched to the SNP, ignoring Labour's warnings about the risks of helping the independence cause. The Lib Dems fear privately they could lose more than seven seats, sinking to below 10 at Holyrood for the first time since the Scottish parliament was set up. Early returns suggest the Lib Dems could lose a prized seat in the northern Highlands and two of its three seats in the capital, Edinburgh.

The strong SNP performance was seized on by the Tories who claimed that it showed that Labour was struggling to position itself as the natural opposition to the Westminster coalition in what was once a natural heartland. Iain Gray, the Labour leader in Scotland, was criticised for running a lacklustre campaign.

After talking up its prospects of gaining an overall majority at the Welsh assembly for the first time, Labour was playing down the idea . One party insider said it would be a good result if it won 29 of the 30 seats (they took 26 in 2007) but expressed concern that the media would portray this as a failure for Labour.

Plaid Cymru, who have governed in coalition with Labour over the last four years, also said they expected to lose seats. Final results will not be in until this afternoon because counting will not start in north Wales until themorning.

Peter Hain, the shadow Welsh secretary, said: "It is nip and tuck whether we will form a majority. I am sure we will get our best Labour percentage share of the vote in the assembly elections."

It was also reported that a Liberal Democrat council candidate, Neil Hamilton, standing in Westerhope, Newcastle, has been found dead after spending the day campaigning.

Police were called to his address after colleagues were unable to contact him, a party spokesman confirmed.

The death is likely to invalidate the result in the ward and trigger a fresh election.